Our Profession Has Stopped Thinking: How Else Could We Have Departed from Sound Economic Principles?

Have you ever wondered how the legal profession, which is trained to ask questions and be skeptical, has not asked why they bill by the hour let alone why we continue to do so? Have you ever wondered how most senior attorneys could have practiced law a lifetime and not realize that the practice of billing by the hour was a recent accident and product of the 1950's and cost accounting methods. Have you ever wondered why old lawyers bicker and banter about how fixed-pricing would not work when in fact it not only works in the legal industry in most other countries, but it also has worked for centuries before the 1950's when WE were a fixed-price profession? Have you ever wondered why professional satisfaction is at historic lows, attrition rates and depression rates at all-time highs, and that this trend STARTED in the 1960's and the problems have become worse every year. Have you ever wondered why law firms used to be an honorable profession, or why lawyers in my grandfather's time were "Primary Care" attorneys who had strong relationships with their clients. . .and why we are now a profession of only Emergency Room Medicine? Have you ever wondered why law firms are run more like an assembly line, with highly and narrowly skilled people with no transferable skill sets, just doing more and more of the same thing every day for the rest of their life? Do you ever feel like the prize for the pie earing contest is. . . well. . . MORE PIE? Have you ever heard of Karl Marx's Labor Theory of Value? Have you ever wondered what economic theory hourly billing is based on? Have you ever wondered if your business model is based on a theory that was refuted one hundred years ago and has PROVEN to have caused the same problems our profession is facing today? Have you ever wondered that? Have you ever thought of it? Ever? Do you EVEN THINK? Who are you? Please be at your office at 4pm . . . I'm coming over to to collect you law degrees and return them to the University that let them sneak out one day when they left the doors open, because the one thing I do know about the profession of law is that we are supposed to be a THINKING profession. We are supposed to ask the TOUGH questions. Our laws are based on centuries of wisdom and theory and it takes THINKING people to make this profession one of honor and integrity and to keep alive its founding principles. He who does the right thing but knows not what he does is not a wise man, for any follower can do what he is told. This profession did not start with thoughless minds and it should not end with them. Law firms who operate under an economic theory that is proven to produce miserable people, high attrition, depression, unhappy clients, and a life destined to be counted in 6-minute increments stands for something that is far too lowly of a true professional. Did you ever wonder why you wake up ever day and carry that flag? Do you ever wonder why you stand for your wallet over your people? Can you possibly stand for honor and integrity and dishonor your workforce every day? Can you possibly continue to operate under this model, never ask why, and then turn around and try to convince clients you are smart? Can you wake up every day and look your children in the eye knowing that they could one day be the victim of a model YOU perpetuate? Could you really put on your website that you believe in diversity and quality of life when it is abundantly clear to the world that you run a sweat shop and have only token diversity? (because of your business model} Can a Nazi waive the Jewish flag and be genuine? Can you look in the mirror every day knowing what you do to people by adopting the billable hour model? IS THAT WHY YOU REALLY DON'T WANT TO KNOW? Malcolm X put it best when he wrote: "If you are not part of the Solution, then you are part of the problem" Where do you stand?

Productization versus Commoditization in the Legal Industry

Little has been said about the problem of the perceived commoditization of legal services. It is clear that professional service providers are suffering from a perception that what they do is a commodity. The problem is so pervasive that many professionals actually believe they are a commodity. Here are some of the contributing factors:

-- The ratio of lawers to non-lawyers has doubled since the 197Os [there are twice as many competing for half the business]

-- The adoption of a pricing model that commoditizes the product (Lawyers sell time. . . even though clients don't want to buy time, they are left in a position of attempting to compare professionals based on time and rate,

-- The behavior modification of the hourly billing model that creates a disincentive to invest time up-front in order to differentiate or educate the client on the "real" product, which is the solution that will be achieved through your expertise

-- The lacking business savvy and diversity of attorneys in general, perpetuating the perception that lawyers are all "the same"

-- The belief of attorneys themselves that they are indeed a commodity.

-- The focus on expertise/experience as the sole basis used to convince clients to hire them. Remember, clients are not in a position to know what level of expertise is required for their job. By leaving it to expertise alone as a criteria, you are causing the client to have to make a decision based on their law opinion, which can be dangerous.

Law firms and attorneys really need to address this problem to remain relevant in the future. The purpose of this post is to suggest that the productization of legal services can be an effective way to deal with this issue and help the clients to understand your "Unique Value Proposition" and make an informed decision. At first glance you may think that producization would contribute to the problem, but in fact it helps to reduce it. Clients are simply not in a position to compare products they do no understand. Attorneys do not, generally speaking, invest the time to educate the client and set out a road map of the case or strategy with them to get buy in on their process before proceeding. There is nothing more amorphous to a law client than a legal engagement. . . . most clients don't know exactly what is happening. . . . to them, their problem goes into a black box and sometimes comes out with a solution, but costs a hell of a lot anyhow.

By creating a product [bundling valued services] together you are turning a mystery into a known quantity. It is now something that is understandable to the client. What's more, you can use your diversity, unique skill, and creativity to craft an offering that simply cannot be acquired anywhere else. In this case, clients have peace of mind, are able to make decisions based on the benefits to them rather than attempting weigh comparative values of attorneys by time and rate against a lay person's own perception of how much expertise they really need to begin with. To date, very few corporate firms have attempted to differentiate on this basis. Few have put together fixed-price packages on the low end to entice clients to use the firm, which is a false promise and cold shower for clients when they realize their next engagement they will be buying more of that amorphous "time" again rather than something they can actually understand!

The Difference Between Value Pricing and Price Gouging: The Difference Between Apples and Oranges!

I find it rather interesting how many professionals confront the possibility of adopting a new pricing model. I find that many professionals make simple-minded mistakes when evaluating alternative models as if they are looking for reasons to rationalize why it won't work rather than actually using their BRAINS to think about how it DOES work. for instance, value pricing is based on the subjective theory of value, an economic theory which requires study and understanding. It is not one that is readily comparable to a cost-plus pricing model on a dollar for dollar basis. Many professionals have lost before they have begun when their limited thinking and binary analysis paralyzes intellectual curiosity at the expense of our great profession. Let me give you an example:

Most attorneys ask the following question: "Well. . . if value pricing is so great, tell me. . . does it end up costing the client more money or less money under that pricing model than it does under the billable hour?

The question itself demonstrates a dangerous level of ignorance about what Value Pricing really is about. The answer is BOTH. The problem with the question is that it does not seek understanding, but it is rather a trap door. You see, the professional is asking a question with only 2 acceptable answers already knowing how to rationalize the dismissal of the pricing theory NO MATTER THE RESPONSE. For instance:

LOWER: If I said it was lower the professional would dismiss the practice on the basis that they will make less money or be less profitable under the model so they will not do it. What they see is the risk of a new pricing model, the risk of error in estimating their time (which is incorrect because value pricing is NOT based on a time estimate], and a lack of financial motivation to change.

HIGHER: If I said the cost would be higher to the client, the professional would dismiss the model on the basis that they already know and feel like clients are getting SCREWED by the billable hour, and that it would be somehow unethical to charge MORE than they already do.

You see, professionals who ask the comparative question have already made up their mind. They are no seeking answers. They are seeking validation for a conclusion they have already made. For those professionals who do seek understanding of a better way and want to become educated on the model, I am hopeful and that you understand that the answer to the question is: BOTH. (Not higher nor lower, but BOTH] Here is why:

Cost-Plus pricing is pricing based on time. It ASSSUMES that all time is valued the same since it is priced the same. Such a silly model cuts directly against a universal principle of the LAWS of DIMINISHING RETURNS. Anyone with an iota of business sense understands this. So, what happens here is that there are times when a professional's pricing is grossly below what they are truly giving in value and also times when it is GROSSLY above the value. Look within yourself for a moment and you will discover the psychological proof of this:

1 - Sometimes you feel like to added much more value than you got paid for, don’t you? (This is because you know the value of the 25yrs of wisdom you just gave away in 15 minutes for only $15O was many thousands of dollars!]

2 - Sometimes as you are billing a million hours for a simple brief you also worry about whether the client really can afford or values all of the time you think is necessary to spend on a case. You wonder whether they will get pissed off or not pay . Somehow you know the client does not value you the way you price yourself!

You see, the cost-plus pricing practice of billing by the hour produces bad results for BOTH the client AND the professional because it is NOT based on VALUE. Sometimes you are getting ripped off and sometimes the client is getting ripped off. It is a value imbalance. And all imbalance produce undesirable results for one party or another.

Value Pricing is about pricing on the margin of perceived value and bringing into balance the transaction between the buyer and the seller. In that instance, you as a professional will feel valued because you are pricing correctly and the client will never go away feeling ripped off. This also aligns you with your client and provides an incentive to ADD VALUE to the client and actually care enough about them to discover what they value and creative ways to accomplish an outcome. You are more than a drone. You are not a commodity so stop pricing like one!

The moral of the story is that professionals need to truly understand the competing economic theories rather than use simple-minded tactics to compare and dismiss competing practices. Philosophers that shaped our world did so with thorough deliberation and thought, not with passing gestures of curiosity. I am shocked that I must challenge our professions to THINK . . . . but if we are serious about progress and positive change, we should try to get back to our roots of being a THINKING profession that considers timeless principals rather than droning on in 6-minute increments in a state of perpetual skepticism. It could change your life. It certainly has changed ours!

The Universal Principle of Value -- What's Missing in a Profession That's Missed The Point

I have been putting a lot of thought lately into what it is about the profession of law that has gone astray and left so many professionals either miserable or driving them out altogether. The perceived "roots" of these problems have long been the subject of scholarly articles and current discussion: Lack of work-life balance, unchallenging work, systemic under-delegation, no diversity (and no more than lip service to solving the problem], competitive individualistic work environments, eat-what you kill systems, and, of course, the dreaded billable our system with it's evil sister [quotas]. I have become passionate about Exemplar and the fixed-price model based on the subjective theory of value because executing on the business model Is DOMINO ONE to all of the other "symptoms" of a broken system. That's right -- the business model fixes and addresses each and every one of the factors that represent the deterioration of an honorable profession.

Many people have trouble understanding how to execute on a model that is based on the subjective theory of value so they depend on a far inferior model that is based on COST or TIME. The Time-based model has been long refuted by business experts and bear no relation to what the customer wants and values and yet the profession that is trained to ask the most questions asks none with regard to why we operate this way. Henry Ford put it quite well when he wrote:

" We do not bother about the costs. The price forces the costs down. The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold?”

What has become even more clear than the impact of Exemplar's pricing model is that every once in awhile an industry or profession varies from the Universal Principle of Value and bad things begin to happen. The business model of billing by the hour started in the late 195O's and since then the way they manage, measure, and compensate knowledge workers has changed. What our industry has seen in the past 5O years is the wholesale deterioration in quality of life, work-life balance, challenge, meaningful client relationships, and loyalty to people in general, but particularly the next generation. Our industry has missed the point. . . . it has gone too far astray from the Universal Principle of Value. We are an industry that is NOTHING without its people and yet it is leaving its own behind where financial gain can be attained. It is no wonder at all that so many professionals choose to vote with their feet and simply walk away. It is also no wonder that professionals like myself have taken a stand for what they believe in. for bringing our profession back into alignment with clients and with the Universal Principle of Value. . . . Because Exemplar is about so much more than a pricing model. . . it is about changing people's lives. There is nothing more rewarding and humbling all the same than to lead our profession back to the center, the core, and one day reach the summit of Excellence at the crossroads of Great People and Profitability. Author James Davis Carter put it well when he wrote:

". . Discovery of the power to aim at ideal ends freely chosen by his own free will and intelligence is the supreme achievement of man, and in that, more than any other in any other single fact, lies hope of the future"

Why You Are In Business: Maximize Profit or Hourly Rate?

So many lawyers simply lack the business sense to understand the purpose of a business. It is widely known that the reason for a business to exist is to maximize shareholder value. In a professional services firm the shareholders are the Partners. All of this sounds logical, right? Well, you would think so until you talk to some attorneys about changing to a fixed price model and hearing them complain, with great business ignorance, about what it might do to their effective hourly rate. Again, they confuse the true goal of business with the "illusion" of profitability, the "effective hourly rate". By this I mean that lawyers seem to obsess about backwards calculating their time to figue out their effective hourly rate based on the fixed price they charge as if it is ANY indication of profitbaility at all! You see, most law firms do not understant the difference between revenues and profit and do not really understand their true profit margins. This lack of business savvy causes attorneys to wrongfully focus on metrics that sometimes run counter to profitability. For instance, top line revnue growth does no equate to increased profitability. Often, in fact, attempts to increase top-line revenues are at the expense of a firm's profit margins. However, because law firms do not truly understand profitability, they have put into place metrics and incentives for their people to increase top-line revenues without regard for profitability: Need an explanation:

Attorneys get paid more when they:
1 - Bill more hours (increases revenues and encourages quantity over quality, pisses clients off, reduces loyalty, increases attrition and burns out your people}
2 - Hoard Work at the Top {increases revenue because Partners bill at higher rates, creates intellectual atrophy by having a work force that is doing work that is well below their competence level at the expense of the client, ultimately compromises the ethics of the profession, and produces low professional satisfaction}
3 - Originate more business - - - SALES COMMISSION! How do you feel about salespeople? So do I!! This promotes a "sell it at any cost" mentatlity. . . . raising revenues, but lowering profit by bringing in clients that are not a fit, will not pay the bill, and are destined to be disappointed and tell everyone they know how much you suck. Your people will hate serving them, will not return heir phone calls, and will resent you for making them serve these clients. The work will be produced slower and ultimately they only create the "illusion" of having more business.

Attorneys also have serious self-esteem problems that lead to a misunderstanding between revenues and profit. What, you ask? Well, attorneys absolutely hate it when they are not busy. . . they feel unwanted and unvalued. Attorneys generally do not think to work ON the business instead of IN the business when they have free time, so they look frantically for ways to fill their time, including lowering their prices to keep busy, or bringing in the wrong clients just to say you have them. Instead, it would be far better to be selective, stand up for your true value, and only work for clients who value you highly and spend the rest of your time working ON the business rather than IN the business. This will significantly improve your operating margin and will make your people much happier.

Who Is At The Top of Your Pyramid?

Take a look around you! Look at the Associates at the same level in your organization. Look at the make-up of gender and cultural diversity. Now, stop. Look up! No, dummy, not to the sky, but to the top of the Pyramid of an organization you work in. Look at the gender and cultural diversity up there. . . . . .now stop crying. I know it is hopelessly sad, I know. Now it is time to get smart. Listen up: The people at the top of your pyramid say an awful lot about what you firm values in its people and what kind of people (white males, egos, etc} make it to the top. Although nobody will explicitly tell you what it takes to make partner or when you will even be evaluated for it, the answers are all around you. . . . . they are written on the walls of the office you work in everyday. Look up. Now, look in the mirror. Do you look like they do? You might want to ask yourself some tough questions about the people up there, like:

-- How do they treat each other up there?

-- What types of values do they have?

-- Do I feel like they care about me?

-- Do they treat us Associates with respect?

-- Have they taken the time to show me what a future can look like in this firm?

-- Have they even given me a good employee review so I know how I am doing? NO! Not a spreadsheet with my numbers, but some quality time with me to make sure I am headed in the right direction to make partner?

-- Do I have a CLUE what these old white guys are doing to develop leaders? Or their successors? Do they even care?

-- If I told the Managing Partner of this firm how much of a jerk one of those Partners is do I think HE will do anything about it? Do you think he would fire the attorney if he refused to change?

If you are like every other Associate I know at BigLaw, then the answer to all of these questions is a resounding NO!! Most associates look up and see an old white-man's club at the top of their pyramid with a small smattering of women who have sacrificed their family and social lives to be there and are unsympathetic to women in our generation who want balance, and a couple self-proclaimed "token" minorities who do not feel valued as equals in the partnership. Most associates look at the top of the pyramid and see big egos, some real jerks who treat their people like crap but develop all of the business. The answers are written on the walls. The answers are all around you. Look at how the biggest rainmaker partners in your firm treat you and ask yourself. . . what does your firm value in its people? What is most important in your firm to succeed. Almost all associates say it is ONLY about the money. . . . that the biggest rainmakers treat everyone around them like crap. . . and everyone. . . yes EVERYONE knows that these people are no there BECAUSE of their values. They are there IN SPITE of their values. There will come a time when you have to ask yourself the tough questions. . . like do you aspire to be what those people are? Is that what you want your life and your working environment to look like 5 or 1O years from now? Do you want to be at a firm that does not value its people? Do you? One thing is for certain. . . . if you do no change it, you will become it.

To this day I have lived by the saying "You've got to stand for something or you'll fall for anything." Ladies and Gentlemen, do you know what you stand for or is your firm taking you for a ride? It may just be your time to figure out what you stand for and stand up for it! There are firms like Exemplar that do care about its people, where values, good character, respect, and success in business development can coexist. The difference is one of courage and vision. It takes courage to stand up for change and vision to pave the way for a better future. We are operating in a time where professional satisfaction in the law is at all-time lows. Attrition rates and depression rates are at all-time highs. Billable hour requirements are reaching a tipping point. Partners at BigLaw have Mortgaged their Associates to the hill to line their golden parachutes for retirement and your pilots will be jumping out of your plane before you. [NOTE: The most profitable corporations achieve significant leverage without these deleterious effects on its people] If you do not see strong young leadership in your firm. . . or a "flight plan" on what you career can look like in the firm, it is because there is no flight plan. So, while you are at the gate of decision it might be the right time to take a different flight. To stand for something instead of falling for anything. There are colleagues around you who are waiting for someone to lead the way. . . even dreaming of it. With courage and vision, together, we can be a part of the future of the profession. I will stand with you in your journey!

5 Interviewing Tips NEVER to Forget!

I am always shocked a how poor a job law students do interviewing with law firms! Although there is no excuse for attorneys to lack independent thinking, I have a suspicion that law schools are not doing their part in preparing students to set themselves apart from the rest. I'm quite sure that it does not help that law schools and students alike believe that big firms are looking for the same cookie-cutter qualities in each person. In this competitive market, candidates cannot afford to blend into the mix. In this blog I wanted to share some the tips we have for attorneys who are applying to a law firms that they should NEVER forget:

1 - Differentiate Yourself!!

I cannot emphasize this more. If you think you are a commodity, people will treat you like a commodity. Remember, you are not trying to get A job, you are trying to get the RIGHT job. A firm that values the unique qualities of its people will want to know how you are different, not how you are the same as everyone else. For example. . . it means nothing to say you are in the top of your class once you have the interview. That is the tactic that got you the interview, but the same tactic worked for everyone else in the top of the class in every school competing for the same position. Think of your unique value to the organization and make your pitch!

2 - Do your Homework

I simply cannot count how many attorneys are too lazy to write a custom cover letter! Probably almost 75 percent of candidates either cannot be bothered or simply feel entitled to a job for writing a "template" cover letter. This will almost guarantee an immediate trip to the rubbish bin at Exemplar. Candidates who proceed with a quantity over quality approach to interviewing with firms just wreak of desperation and low standards. It tells me that you do not care where you work, you just want to work. Do your homework! Look up the firm on the web, and only apply if you really connect with some aspect of the practice. You will need to do this anyhow to differentiate yourself in the interview.

3 - Get over Yourself

Here is what we see when we read most cover letters: Me me me me me me me me me me!!!! Get over yourself! Have you ever had a conversation with someone who always talked about themselves and never bothered to ask about you? Annoying right? The goal of your cover letter is NOT to get you a job. . . it is to get you a MEETING. The Interview is where you show them what you are made of. If we are reading a cover letter, we want to see that you understand where the heck you are applying and have used your brain to think of why you actually belong here and not at the competition! If you cannot make that clear, you are likely to miss the boat!

4 - Interview THEM!!

There is nothing worse that sitting and asking the same 15 questions to every single person. You want a career, not a job! INTERVIEW the firm!!! Demonstrate knowledge of the firm, interest in what they do, and you will discover all sorts of useful information that will help you to identify how you can contribute that the other candidates will not discover. . . . . simply because they DID NOT ASK!

5 - There is only ONE right answer: Be Yourself

I like to have fun with candidates who are trying to guess the right answer (I have to have some fun, right?}. It is clear as day when someone is trying to "please" you and not being sincere about their answers. It lacks transparency and integrity to be anything other than yourself. Think about it. . . in a dream job you would want to just be you . . . and be valued and cherished just as you are. The best way to identify the "dream" firm is to be yourself and the one who values you will hire you. . . and there you have it! The best way to blow it is to try to guess what the interviewer wants to hear. . . . at best, they'll hire you and then figure out who you really are. . . and I don't know about you, but I know what I do when I don't get what I pay for!

There are so many more important points, but you really need to get the points above to get ahead at a firm that values its people. Try it and you might just get the career you are looking for!

Meet Me is Vegas, Baby! Exemplar is Weighing In on the Future of the Profession

In the first of its kind event in the country, Exemplar's Christopher Marston and another noteworthy VeraSage fellow, Brendon Harrex, will be presenting the new business model for the future of the professions in Las Vegas this fall (October 22, 2007). At this event, we will be presenting to younger professionals on:

1) The dilemma of the "traditional" law firm model
2) The new practice equation, including
-- How to implement a better model
-- How the new practice equation increases professional satisfaction
-- How to make more money and ditch the timesheet!!!!!!!!!!

for DETAILS and REGISTRATION, check out the VeraSage website

BASIC INFO:
8:30 a.m. - 5 p.m.
Lunch on your own from 12-1 p.m.
October 22, 2007
Rio All-Suite Casino Resort
3700 West Flamingo Road
Las Vegas, NV 89103
702.252.7628

For all of you cogs in a wheel, dizzy hamsters, sweat-shop wonders, and timesheet fillers, if you want to know how to look forward to going to work everyday, get a life, see your family and make more money, you should consider attending.

More C's of the 4 Cs: The Last Two Count Too!

In the last blog post I focused on the first two C's. Now, it is time to give the last two some discussion. Just as a reminder, here are the 4 C's of Value Pricing:

Comprehend
Create
Communicate
Close

These last 2 C's are really funny. . . . everyone thinks they "get it" and most people don't have a clue. for instance, most attorneys I know insist hey have great communication skills and yet most seem to be socially inept at the same exact time! Simply amazing! Wall Street Journal please take notice, self-awareness in Lawyers is at all-time lows! Communication as a part of Value Pricing is critical. See Below:

ATTORNEY --------------- CLIENT
Value starts here ----------- and ends up here

COMMUNICATE:
The first two Cs are focused on the creation process that all starts with the service professional. Value Pricing is based on PERCEIVED VALUE . . . . in other words. . . your value does not really exist unless the client can see it! So many lawyers miss this point in their practices today. . . they get mired in the details of a legal matter while sitting behind their desk all day and go home so proud thinking they added so much value to the client (even though the client had no idea how hard they laboured to find that needle in the haystack) and the next thing you know the client is calling you complaining about that huge bill you sent them!

When you use a fixed price model, it forces you to COMMUNICATE the value of the services provided. Remember, if you priced based on value and fail to communicate the value to the client, you will certainly not be able to CLOSE the deal. What does this mean? Well, If you did a good job of Comprehending Value then Communicating value should be easy. You are simply taking what you comprehend and stating how what you Create meets the needs that you Comprehended! If it is a perfect marriage you will have a winner. This is different in every scenario, so what is most important here is to watch your client, their body language, questions, etc, and make sure that you got the value proposition right from the beginning. If not, try to understand why and create a proposal that meets their desired needs. Remember: Value is SUBJECTIVE. . . . you need to Communicate the value to create a greater appreciation for your wisdom.

CLOSE:
Sounds easy, right? OK. . . . well try to add as much value as you possibly can, price accordingly, and try to sell on a fixed price against all of those other lawyers who "underestimate" how long it will take to quote a lower price and get the business! Well, it is easy really. The first thing you need to understand is that you are not a commodity. . . . . well. . . you are if you think you are, and then you don't deserve to have more than anyone else. But if you have a special skill or talent or quality and you realize it, than you have a "special sauce!" At Exemplar, we leverage the unique skills and talents of our entire team to create a "you can't get than anywhere else" effect. This has everything to do with closing the deal. . . because it is your job as a professional to communicate how unique and differentiated your services are . . . so that a price comparison between you and your competition is apples and oranges.

Here are some common problems that people deal with and how to address them in closing the deal:

Price Resistance:
Remember -- People are not really price sensitive, they are value sensitive. If someone questions the price, you need to be smarter and realize it is really a value objection: Reinforce the value proposition, differentiate, and reassure!

Offer Solutions: Be creative. If your attempt to communicate value is not successful, you should be creative and see if you can solve their problem or accomplish their goal with "less lawyering" With a little creativity and listening skills, you will often find that clients did not want the kitchen sink!!! So stop throwing it at them!

TIP: KNOW THY VALUE!!! Never lower your price without taking away corresponding value. I could write a blog on this topic alone. It is behaviour modifying. . . if clients think they can squeeze hundred-dollar bills out of you by trying to negotiate, they will do it every singe time. Know thy value, price accordingly, and stand behind the value you add. At Exemplar, clients know we are not cheap. We tell them up front we are not the cheapest shop in town. I personally tell some clients that if they want to shop at Wal-Mart for their lawyer I can refer them to a few down the street. People get what they pay for and they know it. . . . clients who do not want to pay you highly will not value you highly (assuming you follow the 4Cs and did your part!).

Don't be afraid to walk away: Remember: Inventory at the supermarket does not lose self-esteem if it is sitting on the shelf for an extra hour. . . neither should you.

Losing Business To Wal-Mart: former Wal-Mart shoppers end up being our best clients. . . . they first go to lawyers (some at big-firms too!) who underestimate the deal by so much in order to get the business. . . . they think they win. . . the client gets SCREWED. . . and they come to Exemplar never to return to a billable hour firm again. Integrity is more important to clients than saving a dollar. Thanks big-law for sending business our way. The breaches of integrity in our profession can become a wonderful referral source!

Put this on your wall over your desk: It is the formula to success. . .
I feel much better having a free hour to develop better business than to work for a client who does not Value my expertise highly!

When I feel good about what I do, I produce better results for my client.

When I am Valued highly, I feel good about what I do.

When I get paid well, I feel Valued highly.

When I Comprehend, Create, and Communicate Value I get paid well by the RIGHT clients!

Are you getting my drift? If not than you deserve to be blown away by you competition. If so,
you are on your way to success in a Value Priced Model.

The 4 C's of Value Pricing: Get it or forget it!

There are many things about Value Pricing that professionals continue to get wrong. In this blog, I wanted to share the methodology we use internally at Exemplar to train our professionals to execute on a Value Price model: The 4 C's of Value Pricing:

Comprehend
Create
Communicate
Close

For the purposes of this blog, I will focus on the first 2, since these could be the subject of a book and the last C is particular to closing the sale on Value Priced work, which will only happen if you do the first 3 properly. Let me start out by explaining that the Price of work in a Value Price model has NOTHING to do with your time. Say it with me now " The Price of work has NOTHING to do with time." Write it on the board 50 times and say it out loud at least 3 times a day. Value Pricing is about Adding Value to the client and Charging for the value you add. . . . It is ENTIRELY based on Value to the client. Yes, I'm going to have to ask you to repeat that to: It is ENTIRELY based on Value to the client. Now for a lesson:

(Short Story: I recently learned that if you get stuck in a cave for several days in perfect darkness, you would actually go blind. . . .YES. . . blind for good! Did you know that the fish that swim in cave waters are completely blind? Who knew! Why is this relevant? What the heck do you think will happen to your skills if you fail to use them, particularly the ones that are relevant to the 4 C's. So, for your own good, make sure you use your skills lest you lose them!

Comprehend Value:
Have you lost your ability to comprehend value as a result of decades of billing by the hour?
Perhaps the biggest challenge for professionals training in the billable hour model is to Comprehend Value to the client. Most professionals who try a fixed price model cannot help themselves but to try to estimate time in order to arrive at a price. This is almost a sure way to fail at pricing. The most profitable companies do no price products based on their costs, so why should you? They price their products based on the perceived value to the client! How do they determine value? First, they have to Comprehend Value to the client. In each field, there are certain things that clients value. In law, for instance, here are some of them:

-- Getting the job done quickly or at least on schedule
-- Great Service
-- High-Quality Work
-- A Relationship with their attorney
-- An attorney who understands their business
-- A professional who respects them
-- An attorney who returns phone calls

They go on and on. Many value drivers are specific to each engagement. For instance, some clients value being educated on each clause of their contracts, while others are so busy that they value a professional who can do a great job while requiring a little time as possible of the client's time. The key to comprehending value is to ask questions. You might say "I already ask many questions, so I must already get it". Listen up: If it were that simple smarty pants I would not have to be writing this to you. Clearly, it is about asking the RIGHT questions. Right now, you ask questions so that you can understand the substantive work that needs to be done. . . you are trying to understand your mandate. . . . not your VALUE to the client. You need to ask them what they are looking for in a professional relationship. What would the engagement look like to them in an "ideal" world and what would their customer experience be like. What "outcome" are they looking for and how much had-holding or education do they want. In order to value price you need to Comprehend Value by asking smart questions designed to uncover their desires, goals, deadlines, and business strategy. Without this information, you cannot effectively serve your clients no matter what billing model you use!

Create Value:
Have you lost your ability to be creative by being a drone in the billable hour system for years?
This one is simply my favorite one, because this is where Exemplar is so different from most professionals. Remember, we price based on Value and we charge for the Value we add. So, check this out. . . . where are the incentives for your firm and where are the incentives for Exemplar? What do you think is right?


PRICING MODEL

Billable Hours

INCENTIVE (You make more money when you. . . )

Bill More Hours, Drag it out, take your time, pad your bill, be inefficient)

PRICING MODEL

Value Pricing

INCENTIVE (You make more money when you. . . )

Are more effective, efficient, add more value, get the JOB DONE!


Are you getting my drift? In a billable hour model you do no spend any non-billable time thinking with the client about what the best strategy is to approach the case. In a Value Pricing model, we have every incentive to partner with our clients, put our business thinking caps on with them, and think up the most creative ways to approach the problem in order to solve it. It is a strategic process, and often a creative process, which is what is so rewarding about it. At Exemplar, we have an incentive to find new ways to solve old problems. Put incentives in the right place. . . no more hourly bull! No more bill padding and hamster wheeling. . . . put your timepiece down and do the Value Pricing dance! Look at the Incentive chart above again. . . what would you rather do the rest of your professional life?

This is only a short sample of what needs to happen on each of the first 2 C's. The other 2 are critical as well and are worthy of another discussion or blog post. The point here is that Value Pricing is not just a different pricing model. . . It is a different State of Mind and requires different Skills! So, you need to ask yourself if you are a fish in a cave or if you have the skills to pull it off. Be patient with yourself while you learn and develop. You will not become an expert in any of these in a day, but you will notice a significant difference in your lifestyle and in the happiness of your clients as you embark on the journey!

How Powerful The Mirror!

Don't you meet people all the time that make you think: "If only they knew what they looked like!" Don't you just wish you could just get them a mirror and put them out of their misery? I certainly do! I was reading David Maister's great book, True Professionalism, for the 3rd time and got neck pains from consistently nodding at how logical and, well, obvious it is that the measure of an organization is whether it has the courage to define and the defend its values! When I looked up from the book and peered out the window and the competing firm in the ivory tower across the way I had the opportunity to exercise the other neck muscles as I shook my head in disgust at what exists today in the legal industry: A crisis of values!

When I say values I do not mean some politically conservative statement or one of moral judgment. Rather, I mean a conspicuous absence of stated core values that are enforced and alive inside the firm! At Exemplar, we have eight core values: Excellence, Leadership, Integrity, Team, Trust, Respect, Communication, and Equanimity. What does that mean to us? It means that we talk about these values openly in the firm . . . not just once in awhile but all the time. We talk about them in staff meetings and come to a mutual understanding of what these values mean to us and to our organization. Perhaps most importantly, they are NOT for SALE! It is simply unacceptable to compromise any single one of them in our organization. This brings me to the point of this blog: Taking a look in the mirror. If you are a partner in BigLaw I suspect that the idea of all of the Partners looking in the mirror and seeing how people really see them (or what they think of them) makes you worry that they will all jump out the window of the 45th floor as if to re-enact 9/11. I'll bet you are right.

Most associates I know think the Partners in Power treat them like CRAP!
So, wake up and smell the flowers folks. . . it might be time to look in that mirror and see what the "people" around you really think about you. After all, the only person you are really fooling by sticking your head in the sand is you!

At Exemplar we've got mirrors in place from the start. We are instituting a system that allows everyone around you, both managers and subordinates, to rate you anonymously on the eight core values, the results of which are combined into a report that only you and an executive can see. At periodic quarterly reviews you will be able to see what you really look like to people. After all, consider the following on why perception really is reality!

Our VALUES are not an Objective Standard, They are subjective. The ONLY thing that matters is the mirror: Whether people really think you have them.

Take Leadership: You are not a leader if others do not follow. If people do no perceive you as a leader they are sure not to follow. Therefore, what people think about you in this regard is more important than anything.

Take Integrity: Have you ever heard a story about someone with the highest integrity. . . and nobody thought so? Neither have I!! Perhaps people's perception of your integrity is as critical as integrity itself!

How about Respect? There really is no such thing as a respectful person that causes everyone around them to feel like they are treated like crap!

Need I go on? Probably not! So, you ask, what do you do after someone sees what they look like? Just because they see "Ugly" does not mean they will change, right? RIGHT! That is the point. . . . Check this out.

The result of continuously giving people the "mirror" is that how (or if) they respond says a lot about their character. You see, the people who belong at Exemplar simply cannot stand to see the blemishes on their face. They came to Exemplar because they believe in the values and believe that they have every one of them. So, when they see something they can improve they are motivated to take action to make it better. The great thing about the mirror test for us is that it takes a hell of a lot less policing to identify the DUDS! It is this simple: The Duds will no change in spite of what they see! It makes our job easier. People who do not embrace the values are not disappointed when they look in the mirror and see "jerk" or "client hoarder" or "untrusting bastard!" . . . I can go on. . . you know many people who could be described this way!

So. all you really have to do is put people to the perception test and see if they give a damn! Do you have the courage to implement this in your organization? You have nothing to lose (well, unless your window is open. . . and even then the ones who jump probably did need a complete personality transplant!) Can you think of one good reason people should not be accountable to the values of the organization? I can't!

Law Firms Are Over-Managed and Under-Lead. . and Full of People Who Cannot Manage Either!

David Maister and other prominent writers on professional services have all concluded that Law firms are over-managed and under-lead. . .

The fact that law firms simply suck in the leadership category is not worthy of discussion since that sad fact plainly speaks for itself. It is even more sad that, as David Maister so correctly points out, management has beat leadership and true people management is virtually non-existent in law firms today.

My experience is that law firms are full of people who cannot manage and people who refuse to be managed. I find this dichotomy to be quite interesting because you would think that it would take particularly skilled managers to manage a workforce of people who, by their nature "resists" being managed. Instead, firms have given up on trying to manage their people so there is very "management" going on at all.

When I ask Associates where they get feedback from they tell me they get a spreadsheet from "above" that lands on their desk every month with their billable hours on it (so they can worry endlessly about whether they are meeting their quotas).

When I ask what the reporting structure is at their firm most have no idea. When I ask when they last got a "review" with their manager they said "What? A Review?" Some said it happened once two years ago and never since. Most would never describe the person reviewing them as a manager at all. The title itself is simply nonexistent in law firms today. Think about it: The Managing Partner of a law firm does no really "manage" people either. Do you really think that the Partners at the big firm voted in Mr. Popular so that he could give them performance evaluations? Put simply, the Partners do no give ANYONE permission to manage them! They have autonomy! The only thing that Managing Partners really manage are big egos and fires in the firm.

So the problem with law firm structure (a dilution by consensus model) is that is lacks accountability and checks and balances altogether! Partners are not accountable to anyone. . . they are accountable to the collective only, none of which have any individual consent to be managing another. There is no Board of Directors holding the executives (Partners) accountable for being good. It is a corrupt system. . . the Partners are the Directors, the Shareholders, and everyone is the CEO of their own empire. There are no checks and balances at all.

It is no wonder why large firms are unable to build a consistent culture when they are stuck with the sub-cultures created by each Partner who leads a department.

It is no wonder why Partners can get away with treating Associates and Partners alike like crap and get away with it.

It is no wonder why the largest rainmakers are the ones who are allowed to sit on the compensation committees. One day they will accommodate themselves out of existence!

It is no wonder why people -- future leaders -- are not identified and developed within the firm.

It is no wonder why lawyers get away with hoarding their books of business -- the very people who are in a position to fix the problem of client hoarding are benefiting from their self-accommodation!

It is no wonder that attrition rates and burnout are at historical highs.

It is no wonder that a young attorney like myself finds no inspiration in the traditional model. . . one that has abandoned its young . . . one that, by its structure alone, speaks volumes about how they do not value who we are, how we develop as professionals, or whether we have a thriving organization to lead in decades to come.

It IS a wonder, however, why the most inquisitive of professionals do no themselves step off the treadmill once in awhile to take a look in the mirror. To see what you do from afar. To watch how the business model adversely effects your life and the lives of those around you. To escape for a moment the fact that you have spent more than two billing increments reading this blog and realize that you and everyone around you lives their lives this way. . . on a treadmill that simply will not stop . . . tick, tock, drop.

With all of the impact a new business model can have on the lives of professionals in this industry who are crying out for a better life. . . . It is NO WONDER why I would dedicate my professional life to abandoning the billable hour in favor of a model that makes sense and create a corporate structure with accountability, management, leadership, vision, and hope. . . . . . so that thousands fewer of us lawyers have to wake up every day on a treadmill, return home after our children sleep, and see every non-billed moment of our life as an opportunity cost. Finally, they can actually be happy! It would be my greatest pleasure to bring this sense of satisfaction to our people!

Distinguishing Price-Lead Costing from Cost-Plus Pricing

We are finally making some progress on the details of executing on a value-priced model. A reader and fellow attorney commented on a prior post with confusion on the differences between Cost Plus Pricing and Price-Lead Costing, writing:

"I am confused. Throughout your blog you mention that attorneys need to know their costs in order to have an adequate basis on whether to take on a job/client or not. Simple enough, get the accountants/bookeepers rolling and you have your cost basis per day/week/year.The confusion sets in when you say that you must get away from a cost + profit margin model and go to the more ephemeral value billing proposition. I get your value based theory, but I get lost on the details of arriving at "value" without factoring costs per day/week/year, etc. If what you are saying is like Lucky Brand - it costs them $5 per pair of jeans to make, but we as the client value them at $100.00 per pair of jean, then they have provided a value we are willing to pay for (don't get me going on Diesel or Sevens). Regardless, there is the value and then the price you are willing to pay for "fashion". Is this what you are talking about? In your paradigm, is cost important to know the minimum amount you would take from a client and still earn a profit?

On the one hand you state - know your costs. On the other you state that costs + margin should be avoided. Isn't it always cost plus margin. If you know your cost and propose a value billing system to your client, wouldn't it be cost + plus margin with a different definition of margin? "

This reader asks great questions and everyone needs to understand the differences and the subtleties here. First, let's do away with the notion that "billable" hours has anything at all to do with costing. . . IT DOES NOT!!! It costs you the same in salary, benefits, and overhead to pay your secretary whether she's writing a client letter or doing her nails! The attorney is absolutely right that I am saying you must "know your cost," but there are some key operational differences in the two business models:

I think the hang up is that the reader is trying to conceptualize costing the same way he does operating in his current billable hour environment In a cost-plus model, you mark up by a desired profit margin all of your resources so all that you have to account for is time multiplied by a rate. Can I challenge you to change your paradigm for a moment? Think of your business this way: (I simplify)

You have 10 attorneys at a fully loaded cost of $200k/yr each (average)
You have 5 paralegals fully loaded at $80k each
You have 5 Secretaries fully loaded at $60k each.

At a very simple level, your operational costs are $2.7Mil/yr whether you are all playing poker in he conference room or doing hard work. You know and I know that the cost by function can be broken down into monthly costs per resource, and that you have practiced long enough to get a sense of how many full-time equivalents at each level should be required to complete a trial or a legal project with NO CREATIVITY. Remember SCOPE???? This is really important because you have to first sit down with the client and SCOPE the job and let them define the desired boundaries. . . remember with a SCOPE defined you no longer have to "guess" what the boundaries will be because you will have defined it). Now, you are able to arrive at a rough cost.

NOW that we have "roughly" achieved a minimum cost (meaning that we need to add and charge for at least this value to make a profit), let's take a look at the differences between a Cost-Plus Model and a Value Priced model in operation by giving examples of each: first, note the language difference in Cost Plus Pricing (the word cost comes before pricing) and Price-Lead Costing (Price comes before true costing:

Cost-Plus Pricing law firm: Managing attorney evaluates the estimated "cost" of resources fully loaded to be $150,000 based on the Scope that customer provided in the fixed price agreement. As a firm, you decide that a desirable profit (mark-up) is 100 percent, so you give the customer a fixed price of $300,000 for the work. (Note: Take your Lucky Jeans example above . . . I just paid $100 each for the damn things even though I know it costs them $5 bucks to make. . . trust me, when I was shopping I was not thinking about how "lucky" I just make the Lucky Jeans executives, I was thinking about whether my butt looked good in the jeans (ask anyone in my firm!!!). I wish YOU were pricing those things because I could have paid much less than I valued them. Like the law example, you would have decided that 100 percent profit is good enough and in true cost-plus pricing fashion I would have myself a nice looking back end for only $10. I thank you deeply for the good deal! What is your problem? Look outside of your ivory tower. . . . see tall buildings. . . . your firm (and any other law firm) does not own a single one? Why the hell do you think that is? Do you think it could have anything to do with the hamster-wheel pricing model and minimizes profit in the name of risk-aversion? Well, the reason you think this form of pricing makes less sense in the law is because now you have shifted the risk of over-using resources to the firm without any premium in spite of the fact that customers will pay a premium to have peace of mind and certainty. . . . all things that you have not charged for.

Exemplar's Model: Take the same facts as above: We ROUGHLY estimated minimum resource requirements for the desired SCOPE at $150,000. Now, that number stays internal and is put away in a safe for the moment. Now, we use good questioning and understanding of what the customer VALUES to see what all of the non-time related value adds are in the job, what the customer's objectives are, and how we can be CREATIVE to accomplish the customer goals in less time (thus lower cost). We estimate the VALUE of this great creativity and work product to the client based on what THEY want. Remember I said we provide what customers VALUE, not that we provide a list of legal work we can do. Customers VALUE a lot of things. . . . hell, we'll send a town car to pick you up and serve you Godiva chocolates at every meeting if that is what you value. . . we are the Ritz! I will wear a pink underwear if a client values it as much as I do my Lucky Jeans and it only cost me $5 to buy it. Really, we give them a proposal offering a few different options of how we can achieve their objective and price based on the value to the client. Let's say we offer 3 options:

1- Bronze - (economy class)
2- Silver (Coach/Business class)
3- Gold (Premier Class)

If the VALUE of any package falls below our RESERVE price (the internal Least-Cost Estimate) then we will not include it in our proposal. You see, We are not really costing first, we are pricing first and ONLY comparing the Value Price against the Accept/Reject price of $150K.

Now, our work is not done: Project management and creativity is KEY to making a significant profit. Let's say you have a litigation and say our least-cost-estimate is $150k and our client valued it at and paid $450K. Now, I know that they want to resolve the matter as quickly as possible and they have certain bargaining points and are willing to give up others to get a resolution.. . . .we are now able to use effective and creative strategies to get exactly what the client wants WITHOUT spending all those resources. As a client, your interests are now aligned with mine. . . YOU WANT IT DONE!!!! So, If we resolve the case in 3 months at a resource cost of $80K, we made a significant profit and achieved a superior outcome to any law firm in the city. After all, when big firms bill by the hour why on holy earth would they not bill hours adding up to $450k if the client could afford it? Then, they have a big bill, a long trial with no peace of mind or resolution, pissed-off shareholders, and an executive team that is endlessly focused on your clock and not your superior strategy and business savvy.

So, in a Value Pricing model, pricing is made without regard to cost with the only exception that we quote only prices above a rough least-cost-estimate. Then, true costing is an exercise of effectiveness, efficiency, and creativity of our project managers.

I really hope this helped you reconcile my statements about knowing your cost yet not using a cost-plus model. At the end of your comment you wrote:"A little guidance would be helpful as getting away from the billable hour would be a life goal and free up a lot of extra time to spend with people who will appreciate your time more."I am everyday connected with the people who read my blog and whose lives could change if they were able to escape from the billable hour. I see attorneys burning out, losing loved-ones (divorce) and leaving the profession as a result of the never-ending billable hour wheel. My heart is with everyone of you who lives this way and I am living my professional life to help you to discover how you can change yours. . . so that you can see your family. . . see your children smile before they go to bed, to do the things you dreamed to do in your life . . . and to find new meaning in the work you do every day. . . so that you wake up one day and realize that it is not much work at all. It is a passion. A true profession!

What You Compensate is What You Get! Top Line Versus Bottom Line Growth and Why You Should Care.

I am having more fun blogging than ever before. . . finally, readers are asking the intelligent questions that will get us closer to making value pricing a reality. The last comment focuses on compensation systems:

"You mentioned that "we bonus our project managers for managing profitability". What measurement metrics do you use to do that? I had kicked around the idea of bonuses based on revenue per manager or % of deliverables completed on time... which would incentivize them to increase productivity but not necessarily profitability (they might use a quicker more senior resource to get the job done). How do you get to client profitability to incentivize lowest cost delivery?"

Let me first put my comments in context: The incentives that I discuss are ones that will work in a fixed price model but not in a billable hour world. The problem with billable hour firms is that the compensation systems are inherently short-sighted. They are based on lagging indicators of performance and are entirely focused on rewarding and promoting top-line growth (sales commission/origination credit), often at the expense of profitability. Since most law firms are still run by lawyers (and the ones running the show got to be the circus clowns by being the top top-line revenue producers in the firm), They simply do not understand their business well enough to know how to compensate for profitability (not to mention that the greedy bastards on the compensation committee, all who are top-producers and many who make the rules in their favor, have no incentive at all to explore the issue of profitability) I don't know about you, but I would rather have a $50Mil business that is 30 percent profitable than a $52Mil business that is 20 percent profitable.

Now onto some real answers. There were 2 questions presented here:

1) What measurement metrics do you use to bonus project managers for managing profitability
We take a top down approach to this. Remember, every organization has a 100 percent pie to divide up among its people. This game of compensation is really just about wealth redistribution in your organization. First, you should GRADE all of you clients, and instead of giving your people origination credits at the point of sale, wait a year and give the originator a bonus based on the "grade" of the client. After some time, you will realize that some rainmakers are generating top-line revenue growth by bringing in crappy clients. . . some who don't pay and others who are so happy that they will go tell all their cheap friends about you! Reward the RIGHT people for bringing in the RIGHT clients. You should always be grading your clients based on their profitability to the firm.

As for your project managers, the key is to think more broadly than professionals typically do. . . if your business is like ours in that we have long-term clients and not one-time deals, you want to compensate based on total profitability for the client account, NOT on a per-project basis. There are numerous valid business considerations for investing in loss-leaders or going above and beyond to wow a client. Project managers need the room to exercise discretion and then need to held accountable for making good decisions. I get hand-written letters from clients telling us how pleased they were with our service. I'll bonus any project manager who can produce a handwritten client letter! Why? If they took the time to write me a note they will certainly tell 10 of their business colleagues about us. . . and voila. . you have a sales force. Profitable? Certainly? Warm and fuzzy? OK, maybe that too.

Profitability has 2 components: Good Pricing, and Good Costing. Since a fixed price model is about letting the price determine the cost, project managers AND the sales team who made the value proposition are responsible for profitability together. Since in our business the pricing is not set by the project manager alone, but by a committee, there is a standardization of sorts for pricing in our organization. Therefore, what you will notice is that overall defects in profitability should be the responsibility of the pricing committee and project manager specific profitability problems can be taken into consideration in the total compensation scheme at year-end for each PM.

Here is my point: Project manager performance needs to be considered as a whole after multiple projects are completed because some projects will be winners and some may be losers. If you bonus a PM after a big winner and she bombs the next one, you did not reward performance you just rewarded luck at the expense of your year-end winner! Result: A wealth distribution system failure. If you know your business, I'll bet you can rank your top performers and your worse ones. Remember, the comp game is about wealth distribution. Take average salaries. Take your PMs. Rank your top PMs, Rank your Lowest PMs. (You will know who they are too). Take your pie and create a wealth distribution scale in excel that distributes the pie. . . more to the best, less to the worse. Simple, right? (if you have specific questions about profitability metrics, write me and email because it is the topic of a book rather than a blog)
2) How do you get to client profitability to incentivize lowest cost delivery?"
Great question. Notice the subtle distinction between client profitability and least-cost-delivery? What drives your business is client profitability. Ironically, PM's need to learn least-cost-delivery first and certainly need to know that least-cost delivery is NOT least-time-delivery! Why? Because PMs are often likely to think they should do something themselves instead of delegating because:
1) They are control freaks
2) They think they can do it better than you so they don't delegate, or
3) They just do it because they can get it done faster

Each one of these are TERRIBLE for profitability in your business. Control freaks simply don't think about profitability because they are so concerned with controlling everything that they care more about themselves than they do the business! "I can do it better than you" people have a problem because they think the game is about doing low-value (low challenge) work better than you and not about delegating so that they can improve on the high-value work the client really cares about. Time sensitive PMs who do things because they can do it faster than you are also missing the boat. I just want to look at the PM's in category 2 and 3 and just say "no shit! If I did something 10,000 times I would be able to do it better and faster than you too. Is that what you want to do with your life? Is that what kind of life our people should have? Because you can't learn how to delegate your work to someone who values a challenge you have essentially sentenced our younger work force to becoming expert document-reviewers!!!!!!! If they were to send you a hand-written card, what would it say? I'm almost certain it would read "HELP, I'm mired in discovery hell and have been down here for months. How about using some of my Harvard education and delegating some challenging work!?!?" Least-time delivery? Certainly not, but I am smart enough to know that you retain smart people by offering them as much challenge and responsibility as they can handle. . . . and that doing so is a big key to profitability in our organization.

Intelligent Questions Deserve Intelligent Answers

Finally, a professional who commented on my last post asked some intelligent questions worthy of attention and discussion. For the purposes of this post, I will include his questions and comments in quotes and then answer them. Although there are far too many good questions here to answer them all in detail, I will choose a couple and we can move onto the rest in a future post. The professional asked:

"Do you use timesheets internally?I am having trouble letting go of timesheets for internal firm management and am not sure if I should even be trying to. Externally we fixed-price our services, but if I really think about it we arrive at our pricing by asking ourselves 1) what is a client willing to pay and 2)will it be profitable enough for it to make sense for us to service it. It is that second part that requires the measurement of time. Although the time we spend on a project does not dictate the value we create, it does dictate how profitable the firm can be."

Great question! The answer is NO WAY! Time sheets are like toilet paper in a normal business. Forget about professional service firms for a moment and think about the companies that are far more profitable and own billions of dollars in assets. Ask yourself this: Does their profitability depend on the COST of making and delivering their product? Hell yes it does!! News flash: Not a single one of those companies use timesheets and they make so much money it is silly. They all know who their top performers are, their best project managers, and their worse ones. What do you really think you are counting in 6-minute increments? It is like you are counting my pores to prove I have skin!

Here is what I am getting at: Your 2 step process is correct, so I want to give you credit for that, but the conclusions you are drawing from part 2 that are way off and counter to how the real world operates. Question 1 is properly 1) How much is this worth (and how can we design the services to be worth the most) to the client, and 2) What is the RESERVE price. You are correct that in a fixed-price world profits depend on lowest cost delivery. Where you made an error was taking the leap from understanding costing impacts profits to "we have to measure time in advance in order to understand how profitable we can be." Time is only one small part of costing and as our services begin to involve far more than just time, such as service costs, etc, to please the client, or a car service to pick up clients who do not want to drive into the city, you can see that the fascination with counting time is misleading at best.

First, pricing based on value requires that #2 have no impact on price. What you are trying to get at with understanding costing (NOT JUST TIME) to get to an ACCEPT/REJECT Price. This means you will go back to you intellectual "engineers" and see how efficiently they can use firm resources to accomplished the outcome outlined in the SCOPE section of your fixed-price agreement. Only good project managers will know how to do this well. The point is not to maximize profit with this exercise or even to estimate how long you "think" it will take, the point is to identify the lowest-cost-delivery" that would result in an acceptable profit. By doing this, you will know the lowest price that you will accept to do the work. If the value is 3x that price, you have a winner, if it is below the reserve price, you should REJECT the client.

On a side note, here is another problem with time: Most professionals don't understand their business well enough to use time estimates to understand cost. They are used to multiplying by Billable rates, not actual cost per day for the use of a resource. They also do not understand project management enough to realize how to use low-cost resources (NOTE: this is different from low-billable resources) to accomplish an end. Costing as an exercise should be fully-loaded and include more than time in order to be accurate.

"There is a reason that the Big 4 (very scalable, profitable and successful businesses) still use timesheets even when using value pricing. "
First, lawyers who say this do so to rationalize continuing a billing practice that started as an accident and everyone hates. The Big 4 is not value pricing for one, and yes there is a reason (which is neither good nor compelling as a reason for you): That is the way they have always done it!!
As the firm grows my personal involvement and knowledge of project profitability becomes further removed. Without timesheets how do you determine:1) Which jobs are least profitable and need to be re-priced or eliminated?2) Which resources are the most efficient and therefore should received bigger raises?3) How many engagements (and therefore how much revenue) an efficiently functioning delivery team can service at full capacity?"

GREAT QUESTIONS!!!! I could write a book about these! I will try not to, but here you go:

Let me first begin by challenging you here. You preface questions 1-3 with the statement "without timesheets how do you". My problem with that is this: You are assuming there is a relationship between timesheets and the answers to your questions. Prove it, you ask? Again, look at every single profitable company in this economy. . . they have fixed price products and services, no timesheets, and yet they know their price points, costs, which resources are most efficient, who performs best and they understand capacity limitations, etc. I really should write a separate blog about each of these topics, but put simply, the entire world economy works like this and proves that it works. Now, let's explore this in a professional services firm context: However, I will not, in answering your question, acknowledge that there is a relationship between ditching the timesheet as you know it and the questions you ask.

1) Part 1: Profitable JOBS is not you goal as a business. Profitable Clients is your goal: Distinguish between profitable jobs and profitable client. Timesheets distort reality and make for bad decisions. So what if a job is not profitable? What if you have a very profitable client and you decide to do it as a loss-leader? A look at the data might tell you that you need to raise your price, but simple business logic tells you that you did the right thing to "throw em a bone". So, don't lost the forest in the trees: Most lawyers are so afraid to be less profitable in 6-minute increments that they win the battle and lose the war: Higher profitability on a project, but less on average per client

Part 2: There is no such thing as re-pricing a job. It is either within the SCOPE or outside the SCOPE and requires a change order!
Here is the symptom that prompts the question and my diagnosis:
SYMPTOM-- Job 1 is taking too much time and we are losing money on this one
Problem 1
DIAGNOSIS 1
a) Poorly Defined Scope -- Whose fault is this? YOURS! If you Scoped the job properly, you would not have this problem. You should certainly not blame the client and raise the price. You should not fire them either. Remember, you are VALUE pricing. Just because you added $50k in value for $20k in price, remember that they still feel the value you add. WOW them at a loss and capture that value on the next job. Use it as an opportunity to show them what you can do.

b) Clear Scope, work is creeping outside of scope (Scope Creep)
Sometimes the people delivering the service are so far removed from the partners who sold the work and scoped it out that companies experience Scope Creep. Good communication and teamwork goes a long way here. Make sure the team understands boundaries and communicates to the relationship partner that they need to have another conversation with the client about a Change Order.

c) Clear Scope, Project Manager sucks
Again, some project managers will just suck. It is not the client's fault, right? It may cause you to think you underpriced a job but remember: If you actually price on value you simply CANNOT underprice a job. . . you may have taken in when you should not have, but sometimes people will project manage the job so terribly that you lose your shirt. Make sure you get them off the deal. . . . fast! Do not increase the price to the client, LOWER THEIR SALARY INSTEAD!!! Value price your people. You will get to pay your best more in the end!

d) Clear Scope, Error in Accept/Reject Process
Sometimes you scope the job right and every once in awhile realize that you should have rejected the client. If you want to make a lot of money you cannot be afraid to eat one every once in awhile! There is such a thing as a Risk/Reward Relationship in business!!!

e) Client is high maintenance and consuming more resources than expected:
2 choices. . . . 1) What would Donald Trump say ("yer fired!") OR 2) double the price
on the next job. Those clients know they are a pain in the butt and will pay for
someone to put up with them.

Your second Question:
2) Which resources are the most efficient and therefore should received bigger raises?
This has nothing to do with timesheets at all. I know who our most efficient workers and least efficient workers are. Most managers know this without any time accounting at all. How: You give them a bunch of work and see how much they put out and at what rate and quality. I never needed a timesheets Here is what we do: We bonus our project managers for managing profitably. It is their job to delegate internally to get the job done at lowest-cost delivery. Watch this: If someone is not pulling their weight what do you think will happen? Our project managers will not use them for a project because it will impact their bonus. OK . . . so how do you know your weakest players are who are not productive? They are the ones sitting around because none of our project managers want to give them work? What about our best ones? They are busy as hell and in high demand. NO TIMESHEETS REQUIRED! It is a beautiful thing! The best and worse ones self-identify through this system.

TIP: Identify a healthy profit and split the difference that your project managers can achieve above that amount. (remember: do this at a client level, not per-job. There are very compelling business motivations for doing a job or two at a loss. Walgreens happily sells potato chips and batteries at a loss knowing that you will come in and spend $10 more on other things.

Your last question I will leave to a future blog so I don't end up writing a book here.
The point here is this: Timesheets are toilet paper to a normal business. Time-accounting is NOT costing. It is a component of cost, and is becoming less and less as technology, benefits, and other value-added services enter the equation. Accounting for one's time to understand cost, at best, need not be done by minute or hour but instead at a very high level. You might ask your people what percentage of their time went to each of the top 5 accounts they worked on this month and you would get the information you need in order to add time in the rest of your costing calculation.

Top 10 Reasons Why Professionals Don't "Get it" When it Comes to Pricing and Service!

Many professionals just can't seem to get it right. They are so caught up in thinking about how smart they are that they are completely blind to the fact that they are driving clients nuts. They are simply so out of touch with what clients want and yet so convinced that they know what they want all at once that I had to write a blog about it. Although I thank them all for sending business our way by completely missing the boat, it is a part of our mission to "give back" to the community and help professionals to serve clients the way THEY WANT to be served. Here are the Top 10 Reasons Professionals don't get fixed-pricing or the meaning of service!

1) Not Responsive
Yes - You have heard this a million times. The most common cause on non-meritorious malpractice claims in the nation is the failure to return phone calls. What is your problem???? It is not that you are too lazy, your problem is likely to be one of these two things:
1) You are smart as hell and socially inept, so you are a genius who dreads client contact and will never service clients well until you "get it!" OR
2) Your screening process sucks. You serve clients you don't enjoy working with so you subconsciously put off communicating with them and they get pissed off.
You see, this point is NOT about returning phone calls, it is about taking a look at yourself, your process, and you psychology and asking yourself what is going on.

2) No Respect
Yes - it's true. . . most clients do no feel like you respect them. You, their trusted advisor, who they are counting on, do not "explain" things to them, involve them in decision making, or empower them to decide on the strategic direction of their case. You even talk down to them sometimes. You probably don't even realize you do it. Next time you talk to a client, ask yourself if you are "treating them like a partner?" Maybe when you look in the mirror tomorrow you will see yourself differently. Treat clients with respect and they will certainly see you differently.

3) failure to understand scope?
Attorneys just don't get scope altogether. They think that lawyering is just some amorphous process that keeps going until they say it is done and so they lawyer the hell out of it. They bill people to death, and justify their action on the grounds that it would be malpractice not to bill you into bankruptcy because they have a "duty to advocate." Think: They bill by the hour!!! They get rich practicing cover-your-ass law at your expense because you give them a financial incentive to drag things out and lawyers do not hold themselves (or let you hold them) accountable to a SCOPE! Why? They cannot bill to educate and empower their clients and help them to understand what is going on so they don't. If your dog had a 1,000 foot leash what would he do with it? See spot run!!!!!!

4) Can't Comprehend Value
This is funny. . . lawyers just don't know how to look at anything other than their time to understand value. We teach fixed pricing techniques and time and time again lawyers go back to asking "well. . . how do you know how long . . . blah blah blah blah" as if the client gives two hoots how long it takes. Remember, they want it done faster!! Why do lawyers care how long it takes? Because they just don't get that their effective hourly rate has NOTHING to do with profitability, but since they have been clueless about how profitability is achieved in a "normal" business for so many decades, they have lost all ability to comprehend value except in terms of time. It is a darned shame, but let's talk about how to solve this problem.

5) Cost-Plus fixed Pricing WILL NOT WORK!!!!
Lawyers seem to think that a fixed-pricing strategy is about menu pricing. They have it all wrong. If they did their homework, they would understand that there are many ways to accomplish fixed-pricing and menu pricing will NOT WORK. We price on value to the client. A firm will not be highly profitable if it attempts to menu price because it is essentially a cost-plus pricing model where they shifted the risk of error (in time) to the service firm without compensation for the risk.

6) It's all about the quality .. . . NOT!!!!!!!!!!
If you did not get the memo, GET THIS ONE: All research studies show that clients do not hire you for your "quality" so put your pride back in it's big box and listen: Clients expect quality from any professional! Clients want a quality professional who CARES about them. So, while you are on your bathroom break after 12 straight hours in your sweat shop, ask yourself how you think your clients would respond if I called them up and asked them if they felt you really cared about them! If you are honest with yourself, you might be surprised what you find. Don't make me pick up the phone and try.

7) Lack Business Sense
Most business attorneys simply lack business sense altogether. They operate to "reduce risk at all cost" because somehow they feel like they were put on this planet to do this job. . . . It is like they actually believe brownie points come from the identification of problems rather than SOLVING THEM!!!!! Why do you think Law is one of 2 professions of 104 professions where pessimists perform the best? Pessimists have a knack for identifying all the problems with everything . . . they don't solve a damn one of them, and they drive everyone around them nuts . . . . they simply cannot help themselves! It has almost become an extra-curricular activity watching these bozos blow up a business deal and pound their chests like gorillas thinking they did something "valuable!"

8) Old White Men! :-)
Unlike "normal" businesses, our industry is run by a bunch of old risk-adverse white guys. So, while the rest of the world is innovating (mostly lead by young people who can live to benefit from the revolutions they are creating), the old whities at the top of the legal pyramid scheme are too busy lining their retirement plans at the expense of young associates who sold their lives for the "dream" of parnership they don't understand, let alone have a chance at making. WAKE UP! If the "Partners" did not tell you what the succession plan is at their firm yet, it's because they don't have one. It's OK, we are accepting resumes! Don't think they will start to care anytime soon! Why do clients care about this? Who wants to play with a dinosaur?

9) Phone Call and Photo Copies!
If you bill for either you are either dangerously stupid or simply don't care about your clients!!!! I deal with CEOs of companies and they don't bill me to talk to me! If you fall into the category of dangerously stupid, read on:
-- Let me enlighten you: CLIENTS HATE IT! STOP BILLING TO TALK TO PEOPLE! Every shred of information in the market shows that clients are absolutely enraged by this process. Now, you are on notice, so if you continue this practice you have effectively graduated from "dangerously stupid" to "I simply don't give a damn about what my clients want" Seriously, I have no idea how you rationalize it except that you are so "entitled" as to require people pay to have a conversation with you that you simply cannot let go of it OR God forbid you could not bill a client for your next toner cartridge!!!! for God's sake, clients understand that you have to operate a profitable business, but could you please do it in a way that does not drive them absolutely nuts????

10) Managing Resources
Lawyers simply don't get how to manage resources to do a fixed-price job profitably. Project management is not an art that lawyers tend to understand. We find that we need to teach attorneys the principles of project management. for instance, law firms suffer from systemic under-delegation. Part of this is ego, because lawyers tend to believe that they can do things better than someone else. It is also about control and profitability. Since they bill by the hour, they actually make more money by doing things that really can and should be done by someone else! Client's are more savvy than ever, and lawyers will not get away with this practice for very long!

OK. Please find attached bottle of e-lotion for your wounded back-end. The problems in our industry are real and need to be addressed by bringing them out in the open and discussing them to solve problems that change lives and the customer experience. It is within our power to make change, but first attorneys have to face the music. Exemplar is leading the movement. Will you rise to the challenge and be a part of the discussion?

Outside-In Pricing -- Because Good Clients Don't Want To Insult You

One of the best parts of pricing on value is the ability to use difference pricing strategies with different clients. One of the most interesting to us and yet the one that scares the heck out of professionals is outside-in pricing. What is that? Outside in pricing is about looking outside of the four walls of your office building to determine what your work is worth to the client. Did you ever think to ask your client what it is worth? Why not? (Because you are scared to death what they might say . . . that they might tell you they think you are worth half of what your firm needs you to charge to make everyone rich.) Well, that is what we do sometimes. . . . and it works great most of the time.

Think about it this way: There is psychology on your end -- the fear that they may not value you as much as your ego desires. Just the same, there is psychology on their end -- The fear of looking cheap or insulting you with a low price. Actually, it is a great way to see if 1) You have done a good job communicating the value proposition, and 2) whether or not they really value you anyhow. Wouldn't you rather know BEFORE you took them on as a client?

Here is another benefit: Just think of how much easier your life would be if you never needed to fill out a time sheet again. . . . you and your client just agree to a price and off you go! No counting, no billing, no collections, No Hourly Bull! Why did you choose to be a professional? When you graduated law school was your stated goal to have the highest effective hourly rate in the profession? Was it your goal to bill more hours than your colleagues? For most people I know, it was to be happy, balanced and make good money. What is good money? I guarantee that you do not think of "good money" in hourly rate terms. You think about what you take home and you look in the mirror and think about whether you enjoyed work this month, whether you saw your wife and children enough. . . and you balance it all and ask yourself "was it worth it all?" At the end of the day, no matter how you bill, you are asking yourself these questions and not "how much do I charge per hour and how much did I bill?" If you did, you either need a life or a brain transplant.

Outside-In Pricing teaches you to communicate value, understand how customers value what you do, and free you from counting your life in 6-minute increments .Repeat after me: "Increments are Excrement! Increments are Excrement" . . . . . yeah. . . you're getting the hang of it now!